Recently, I saw someone on Facebook bring up this case, Hyland v. HomeServices of America, Inc., 771 F. 3d 310 – Court of Appeals, 6th Circuit 2014, as pretty much ending the threat from the series of lawsuits filed against NAR, large brokerages and franchises, and a number of MLSs. (If you are a large brokerage or a large MLS and you haven’t been sued yet, give it some time — I’m pretty sure something is coming your way in the not too distant future.)
Given that Hyland is a Court of Appeals case, and one that involved a claim of conspiracy to keep commissions high, that does sound pretty reasonable. So I thought I’d put my legal education to use and actually read the case and think about it some.
Caveat: I am not an antitrust specialist, and I am definitely not YOUR attorney. So none of this is legal advice; this is semi-informed musings of a blogger/consultant. Please consult with your attorney about anything here that might pertain to you.
With that said, my general take is that Hyland might be important, but I seriously doubt that it is dispositive. The plaintiff’s lawyers involved in the Moehrl case are too smart, too good, and too well-financed to make that much of a boneheaded mistake. But there are some interesting takeaways from the Hylands case we should look at.
An Overview of Hylands v. HomeServices of America
Seeing as how most normal people don’t read legal opinions for fun, I’d tell you go to read the whole thing, but… well, let me summarize what appears to be the important things about this case.
Basically, this was a class action lawsuit brought in Kentucky federal courts alleging, among other things, that the defendants (HomeServices of America and its various subsidiaries) “violated Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, by participating in a horizontal conspiracy to fix the commissions charged in Kentucky real estate transactions at an anti-competitive rate.”
The lawsuit came after and stemmed from a controversial Rebate Ban that the Kentucky Real Estate Commission put into place in 1999. The U.S. Department of Justice went after Kentucky for that ban on rebates in 2005, and the lawsuit was settled and the regulation establishing the rebate ban was abolished. Shortly after that action by the DOJ, the plaintiffs filed this lawsuit:
This action was filed shortly thereafter. The fourth amended complaint alleges that defendants “combined, conspired and agreed to fix, maintain and inflate real estate broker commissions and associated fees and refuse to compete on the basis of price.” Specifically, defendants “have charged a real estate broker commission of 6%, have described this 6% fee as the `standard’ or `typical’ fee, and have habitually refused to negotiate a lower fee.” According to the complaint, this collusion resulted in sellers being forced to pay artificially inflated commissions.
The district court awarded summary judgment for HomeServices, the plaintiffs appealed, and this opinion is the result. The Sixth Circuit sided with the lower court, meaning with the defendant.
So far so good! This looks a whole lot like Moehrl v. NAR, doesn’t it? An antitrust claim based on the 6% commission, refusal to negotiate a lower fee, sellers being forced to pay “inflated commissions” and even the spectre of buyer steering, as we will see shortly.
The Key Legal Issue
The Hylands opinion is a bit complicated, as it is an appellate review of a lower court’s decision. So the court spends some time talking about standards of review, and so on. That’s interesting only to lawyers, as far as I’m concerned.
What might be of more general interest is the core legal concept that the Court uses: conscious parallelism. What in the world does that mean?
Evidence of “conscious parallelism,” also referred to as “oligopolistic price coordination,” can support such a claim based upon circumstantial evidence. In re Baby Food Antitrust Litig., 166 F.3d at 121. As the district court put it, “When competitors in a [concentrated] market establish their prices, not by agreement, but rather in a consciously parallel fashion, this may provide probative evidence of an understanding between competitors to fix prices.” Mem. Op. at 16 (citations omitted). However, that is not necessarily the case: “Because of their mutual awareness, oligopolists’ decisions may be interdependent although arrived at independently.” Id. (citation on omitted). Thus, “`[t]he law is settled that proof of consciously parallel business behavior is circumstantial evidence from which an agreement, tacit or express, can be inferred but that such evidence, without more, is insufficient unless the circumstances under which it occurred make the inference of rational, independent choice less attractive than that of concerted action.’” Id. (quoting Bogosian v. Gulf Oil Corp., 561 F.2d 434, 446 (3d Cir.1977)).
Let’s try to decipher this into plain English.
To establish a violation of antitrust law, the plaintiff must show a conspiracy. That conspiracy can be shown with direct evidence (“must be evidence that is explicit and requires no inferences to establish the proposition or conclusion being asserted”) or by circumstantial evidence. Direct evidence might be something like an email from one defendant to another that says, “So glad you agreed to our scheme to never charge less than 6%! Welcome to the conspiracy!” That’s pretty direct evidence.
It goes without saying that direct evidence is not exactly commonplace. People who are dumb enough to produce direct evidence of a conspiracy are rarely smart enough to form that conspiracy in the first place.
So the real action is in the circumstantial evidence. By that I mean, sort of looking at the actions of the defendants to see if they make economic sense outside of some kind of a wink-wink understanding that’s been reached between them all. The key part of the above paragraph is the highlighted section above.
All of that legalese is to say something really unclear: proof of consciously parallel behavior is evidence of a conspiracy, but unless the circumstances show that the behavior doesn’t make selfish economic sense outside of a conspiracy, it isn’t enough evidence. Yeah, I know, some clarity that is. Not.
So practically speaking, the plaintiff has to show not just that (a) defendants did similar things (“parallel”) but that (b) those similar things would be irrational economic behavior but for the existence of some kind of a conspiracy/agreement/understanding.
Hylands Did Not Meet that Standard
In the Hylands case, it appears that the district court did not think that the plaintiffs met that burden: showing that the whatever parallel action taken (i.e., high commission rates) are economically irrational but for the existence of a conspiracy.
The lower court concluded that the evidence “shows merely” that the defendants had a policy of charging 6%, but that they often charged less or more depending on the situation. So, the court concluded that brokerages could have reached that 6% pricing policy independently by looking at what other companies charge (parallelism); it’s like how every gas station on the corner charges within a penny of every other gas station.
Importantly for our purposes, the court concluded:
• “The Sixth Circuit has unequivocally proclaimed that `setting cooperative sales-commission rates is not price fixing: it has no relation to the amount charged to clients for an agent’s service.’ Re/Max Int’l, 173 F.3d at 1025…. Thus, even if it was necessary for a listing broker to offer a 3% buyer’s broker commission to the cooperating broker as an incentive, the listing broker is free to charge his client 4%, 5%, 10%, or even 3% plus a flat fee as [plaintiffs’ expert] Dr. Yavas has suggested may occur in a perfectly competitive market.” Mem. Op. at 31-32 (Page ID 21934-35).
I’ll get into why this is important below.
At the end of the day, the lower court basically said that the common motivation to maximize profitability is not evidence of a conspiracy; if it were, every business everywhere would be guilty at all times.
So to be clear, the profit motive is important as what the plaintiff had to show was some kind of parallel action that would tend to go against the self-interest of a company that would make no economic sense unless there was some kind of a conspiracy in place.
The Court of Appeals agreed with the lower court, and held for the defendants, and that’s the story of Hylands.
The Moehrl Case
Now, I haven’t written too much about the Moehrl case since the new amended complaint was filed, and I may need to do that at some point, because the Amended Complaint is significantly stronger than the original, and… well… I don’t want to claim that the attorneys might have read a couple of my writings on the subject but… let’s just say that the modifications are interesting.
The first thing I’ll point out is that there is literally zero chance that top-notch attorneys like the ones at Hagens Berman and Cohen Millstein missed a freakin’ Court of Appeals opinion that appears to be directly on point. Okay, maybe not literally zero, but if that happened, there are going to be a lot of high-flying litigators getting fired soon. So no, I seriously doubt that the plaintiffs in Moehrl somehow missed a Federal Sixth Circuit decision. They’ve already read it, and have already taken it into account before they filed the suit.
Second, more substantively, the Moehrl attorneys are not claiming a vague circumstantial conspiracy. They are claiming that the very rules of NAR (which they collectively call the Buyer Broker Commission Rule, thereby avoiding the whole “there ain’t no such thing as a BBCR” angle) constitute a conspiracy.
As I wrote in a previous post on the topic, I don’t think establishing the existence of a “conspiracy” will be difficult for the Moehrl plaintiffs, nor will that be contested by the defendants. What will be contested is that the conspiracy is for an unlawful purpose:
This one seems like a slam-dunk for the plaintiffs to me. I mean, there is no doubt that NAR exists. There is no doubt that the Buyer Broker Commission Rule (and other rules) exist. Those rules are the result of a group of people meeting, discussing, and voting on and passing them. Nobody involved thought they were doing something other than debating rules and passing them. This is as voluntary and as intentionally as it gets.
The four named real estate companies all have executives who have been active members in NAR. At a minimum, they have communicated their views on a variety of issues and rules and policies to NAR staff and elected leadership over the years. Of course they did. NAR is a trade organization, after all.
So the “common and mutual understanding” between and among the defendants will not be a problem. The challenge will be to establish that what they came up with is to an “unlawful purpose.”
I don’t really think the Moehrl case will turn on circumstantial evidence of the existence of a conspiracy. The conspiracy, in the legal meaning of agreement and understanding, exists. No one denies that. The issue is the purpose behind that agreement and understanding and the legality of that purpose.
Rational Independent Choice
I don’t think that the Moehrl lawyers are going to bother with intent. That is, I don’t think they’ll be trying to paint the brokers and agents and NAR leadership and MLS leaders as some kind of mustachioed movie villains rubbin’ up their mittens trying to screw consumers. They might, but I think that’s counterproductive and easy to defeat because some of the people involved with NAR and the local MLS are some of the nicest, kindest, most decent human beings you will ever meet. They’re locally popular, are community leaders, and are charming and well spoken. You rarely get to be a really successful agent or broker if you’re not a nice likable person.
What I think they’ll do is to paint the “BBCR” (the collection of various rules of NAR and the MLS) as having an anticompetitive impact, whatever the original intent. I think they’ll use some variation of the “road to hell is paved with good intentions” thing so they can say, “All these defendants are very nice people just trying to make a living, but the conspiracy and the rule they created has a really negative impact on the housing market and on sellers.” Something like that.
And to do that, they will need to show companies and individuals engaging in behavior that is not independently rational but for the existence of the conspiracy, i.e., the need to share commissions. I don’t think that will be that difficult.
Exhibit A: Redfin
We can expect Redfin to be Exhibit A in that argument. Why in the world would Redfin charge 1% listing fee, put that on all of its marketing, promote it like crazy, but still offer out the standard 3% cooperating compensation? It’s really hard to make that decision look like a rational independent choice by Redfin.
The same goes for other discount brokerages who charge low listing fees, but somehow still compensate fully. It’ll be interesting to see how that gets discussed in court.
Because the passage above from Hylands is interesting in its inversion. The court says, “even if it was necessary for a listing broker to offer a 3% buyer’s broker commission to the cooperating broker as an incentive, the listing broker is free to charge his client 4%, 5%, 10%, or even 3% plus a flat fee.”
Okay, but what happens if the issue isn’t the freedom of the listing broker to charge his client whatever, but the freedom to offer 1%, 2%, 3%, 10% or a flat fee buyer’s broker commission? Do listing brokers have that freedom?
If the answer turns out to be no, they don’t have that freedom, then the Moehrl lawyers can and will assert that even if NAR’s intent was not to be anticompetitive, the effect of its various rules is anticompetitive and therefore, the already stipulated conspiracy (aka, the rules of NAR) is in fact for an unlawful purpose.
Exhibit B: Zillow Offers, Opendoor, etc.
The second class of companies that the Moehrl lawyers are almost certain to call are the iBuyers like Zillow, Opendoor, Offerpad and others.
Because all of them — at least on the data I have to date — offer out the full cooperating compensation. In the case of Zillow, over all 110 of its transactions in Phoenix for the month of March, Zillow’s listing agents offered the full 3% in compensation to buyer brokers. Why? What profit-maximizing rationale is there for that? My agent, I’m only going to pay 1%, but the other guy’s agent? Why, she gets the full 3% commission!
NAR and the defendants are going to have to explain why that is a rational independent choice by institutional iBuyer companies, who are paying their listing agents only 1% (typical for any institutional client, by the way).
Let me suggest that will be a tough row to hoe. Not that it can’t be done, but I wouldn’t want to be the lawyers trying to make that case.
Conscious Parallelism, On the Other Side of the Deal
Basically, I think we see the conscious parallelism doctrine from the Hylands court turned around. It isn’t the similarities between what the various companies involve charge the seller (and pay the listing broker) that will be the key issue, but the similarities between what they all pay the buyer’s broker that will be important.
So we come back to what I have already written about this case: this will turn on the issue of buyer steering. From my earlier public post:
So it appears to me that as this case gets litigated, the key issue is whether buyer agents do or do not show houses where the cooperating compensation is low or non-existent.
What the defense counsel will say is likely a variation of the arguments being advanced by REALTORS all over Facebook and the comments section of blogposts (including my previous post): the unilateral offer of compensation is a contract between the listing broker and the selling (buyer’s) broker. The consumer is not a part of it. The consumer is free to negotiate the commission, and to offer $1 if he wants to. Nothing is stopping that, so if the seller is offering compensation, it’s normal competition, normal economic behavior.
What I think the plaintiff lawyers will do is to show the Randy Ora video above, call people like Glenn Kelman to the stand, see if Joshua Hunt of Trelora wants to testify (I’m going to guess, the answer is probably Yes) and so on. Why Joshua Hunt? Watch this:
His sin at Trelora was not offering enough in the way of cooperating compensation.
Play that video in front of a jury and it’s going to take some doing to convince a bunch of regular non-REALTOR people that everything is kosher in our world.
If the conscious parallelism of paying buyer brokers the full cooperating compensation is so that buyer agents will not blacklist their properties… well, the Moehrl lawyers have their path to victory wide open at that point.
On the Other Hand….
But that doesn’t mean that the Moehrl lawyers automatically win. Everything depends heavily on the evidence laid before the court.
I think there are at least two ways in which the plaintiffs lose here.
One, the evidence can show that buyer steering is a rare thing. Maybe one or two bad apples throw bricks through Trelora’s windows, but 99% of real estate agents do the right thing and show the house, no matter the compensation amount and type offered. That would be pretty powerful evidence that the plaintiffs are making a mountain out of a molehill.
Two, even if buyer steering is commonplace, NAR and the MLSs and the various defendant brokerages really discourage the hell out of it. I’ve already mentioned that buyer steering is against the Code of Ethics, as well as against the law of agency. If NAR can establish that it routinely goes after REALTOR members who steer buyers based on commission, disciplines them, and offers tons of training telling REALTORS not to do that… there is a chance that the courts might absolve NAR and the defendants from liability but tell everyone to police the ranks of the agents better.
I’m not entirely sure how such a thing would work, but it might be one of those Solomon’s judgment deals where the court does hold that requiring sellers to compensate buyers is a No-No, but that NAR and the defendants are not actually guilty of doing that so damages will be drastically cut.
There might be other paths to victory, and really, as more facts emerge, we’ll be able to make better guesses.
For now, though, while the Hylands case does look like it’s going to play an important role in the current crop of cases, it doesn’t look like it’s a slam dunk win for NAR and the corporate defendants. It’s different enough in critical aspects that while I’m sure it will be brought up, it will not dispose of the case.
No, this case will turn on the question of buyer steering.
-rsh
